Widespread scrutiny of the Paycheck Protection Program has prompted a flood of PPP loan fraud investigations by the Department of Justice, in coordination with a number of other federal investigative agencies, such as the IRS and FBI. At the same time, the U.S. Small Business Administration (SBA) has announced that borrowers who received $2 million or more in PPP funds will automatically be subject to an audit, as will some borrowers who received smaller loans, as part of an ongoing effort to identify any potential abuses of the federal loan program. If you are a small business owner and you applied for or obtained a loan through the Paycheck Protection Program, you could be at risk for an SBA audit or a federal investigation, which could lead to criminal charges. The penalties associated with PPP loan fraud are severe, so don’t hesitate to seek legal guidance. Contact our PPP fraud attorneys at Federal Criminal Defense Pro today for a free initial consultation.
About the Paycheck Protection Program
The Paycheck Protection Program (PPP) is a $670 billion federal loan program that was established by the SBA in March 2020, under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. In the midst of the coronavirus pandemic, the PPP was intended to provide business owners feeling the economic effects of COVID-19 with a direct incentive to keep their employees on the payroll, by providing access to the capital necessary to pay employees’ salaries and support ongoing business operations. A key component of the Paycheck Protection Program is the provision that the loans could be forgiven entirely provided that recipients retain their workforce, maintain employees’ salary levels, and use the funds to cover payroll costs and eligible expenses. The loan amount is based on the number of employees and average payroll costs, and while at least 60% of the loan must be used for payroll, the other 40% can be used for interest on mortgages, rent and utilities.
Why PPP Loan Recipients May Be at Risk
What business owners could not have known when applying for and obtaining PPP funds to cover payroll and other costs during COVID-19, is how susceptible the loan program would be to fraud schemes, how aggressive the federal government’s oversight of the program would become in the weeks and months after it was introduced, and how difficult it would be to ensure compliance in order to have the loan forgiven. The rules and regulations governing the Paycheck Protection Program seem to be constantly changing and business owners may find themselves unsure as to whether they are eligible for a loan or qualify for loan forgiveness. With the Department of Justice carefully investigating allegations of PPP loan fraud and the SBA auditing PPP loan recipients, the potential risk of facing criminal prosecution for PPP fraud is high.
What Constitutes PPP Loan Fraud?
The rollout of the Paycheck Protection Program in March was rocky to say the least. Amid record unemployment numbers and ongoing concerns about the coronavirus pandemic, small business owners scrambled to obtain PPP funds before the cash ran out and lenders struggled to keep up with the influx of loan applications. As of mid-July, the Paycheck Protection Program had guaranteed a whopping 4.9 million forgivable loans for a total of $521 billion in funds. Unfortunately, the widespread confusion surrounding the PPP resulted in some businesses receiving funds they may not have been entitled to. Others who believed they were eligible are now confused about the terms and conditions of the loan program, namely the strict criteria that make the loans forgivable. As the federal government undertakes a massive effort to root out abuses of the Paycheck Protection Program, many PPP loan applicants and recipients are now concerned about facing an audit or investigation, or possibly even being charged with a crime. The following are some examples of actions that could result in criminal prosecution for PPP loan fraud:
- Underestimating the number of employees or misclassifying employees as independent contractors in order to qualify as a small business
- Making bad-faith certifications on a PPP loan application
- Inflating payroll costs in order to receive a higher loan amount
- Obtaining PPP funds from multiple lenders
- Using PPP funds for unauthorized purposes (i.e. personal expenses)
- Firing or failing to rehire employees or cutting employee salaries, despite receiving PPP funds
- Making bad-faith certifications on an application for PPP loan forgiveness
- Misrepresenting or concealing information during a PPP audit or fraud investigation
PPP Fraud Crimes and Penalties
The CARES Act does not contain provisions for criminal enforcement of the Paycheck Protection Program. Rather, the Act simply states that PPP loan recipients who fail to satisfy the employee retention and qualified expenses criteria for loan forgiveness must repay the loans at an interest rate of 1%. Thus, the Department of Justice has had to rely on pre-existing federal statutes in pursuing charges for PPP loan fraud. The following are some of the federal crimes the DOJ may pursue against individuals suspected of committing PPP fraud and the associated criminal penalties:
- Bank fraud (18 U.S.C § 1344) – A maximum sentence of 30 years in prison and/or up to $1,000,000 in fines
- Wire fraud (18 U.S.C. § 1343) – A fine and/or a maximum term of imprisonment of 20 years (or 30 years, plus a maximum fine of $1,000,000, if the violation affects a financial institution or involves any benefit associated with a presidentially declared major disaster or emergency)
- Mail fraud (18 U.S.C. § 1341) – A fine and/or a maximum prison sentence of 20 years (or 30 years, plus a maximum fine of $1,000,000, if the violation affects a financial institution or involves any benefit associated with a presidentially declared major disaster or emergency)
- Making false statements to the SBA or a financial institution (18 U.S.C. § 1014) – A term of imprisonment of up to 30 years, a fine of up to $1,000,000, or both
- Aggravated identity theft (18 U.S.C. § 1028A) – A two-year term of imprisonment, to be served in addition to the penalty for the underlying felony offense
- Attempt and conspiracy (18 U.S.C. § 1349) – Any attempt or conspiracy to commit a fraud offense is punishable by the same penalties as the actual fraud offense
- Making false statements to federal agents (18 U.S.C. § 1001) – A fine and/or a maximum sentence of five years in prison
- Conspiracy to defraud the government (18 USC § 371) – A fine and/or a term of imprisonment of up to five years
- Tax evasion (26 U.S.C. § 7201) – A fine of up to $100,000 (for an individual) or $500,000 (for a business), a term of imprisonment of up to five years, or both
Of the charges federal prosecutors are pursuing in connection to PPP loan fraud, the most serious penalties are obviously tied to crimes like bank fraud, mail fraud and wire fraud. Even simply making a false statement to the SBA or a financial institution can lead to a prison term of up to 30 years, a fine of up to $1,000,000, or both. The other federal crimes listed above carry lesser penalties, but the maximum sentences that can be imposed for these crimes still include hefty fines and years spent in federal prison. The same is true for any offense charged under the federal attempt and conspiracy statute. If you are accused of attempting or conspiring to defraud the Paycheck Protection Program, even if you don’t actually receive PPP funds, you could still face the same criminal penalties upon conviction as you would if the fraud crime had been successful.
DOJ Aggressively Pursuing PPP Loan Fraud Charges
Federal investigators and prosecutors have ramped up their efforts to combat PPP loan fraud over the past several months. Since May, more than a dozen individuals in 11 states have been arrested and criminally charged with fraud crimes or the attempt to commit fraud crimes like bank fraud, wire fraud and making false statements to a financial institution, and the DOJ has issued a press release announcing the charges in each case. For the most part, the government’s criminal prosecution of PPP loan fraud appears to be focused on the following three types of allegations:
- Applicants making false or misleading statements on PPP loan applications in order to fraudulently receive PPP funds,
- Loan recipients using PPP funds for unauthorized purposes, and
- Loan recipients making false or misleading statements on PPP loan forgiveness applications in order to fraudulently qualify for loan forgiveness.
How Our PPP Loan Fraud Attorneys Can Help
Federal PPP loan fraud investigations are underway and have already resulted in criminal charges in a number of states. The first PPP fraud charges were filed against two businessmen from Rhode Island who allegedly filed bank loan applications in an effort to fraudulently seek more than half a million dollars in forgivable PPP loans, and in the weeks that followed those initial charges, the DOJ showed time and time again that it is intent on making an example of those who use or attempt to use the coronavirus pandemic as an opportunity to commit fraud. If you have been accused of making false statements on a PPP loan application, misappropriating PPP funds, fraudulently applying for PPP loan forgiveness, or any other alleged abuse of the Paycheck Protection Program, you could be at risk for a federal indictment and criminal prosecution. To discuss your legal options in detail with a knowledgeable PPP fraud defense attorney, contact Federal Criminal Defense Pro today.